Greg MacKinnon, Pension Real Estate Association... ... investing in higher cap rate properties, in less expensive markets nationwide, consistently deliver higher returns on a risk adjusted basis than focusing on quality properties in expensive cities. These results underscore the idea that Value Investing is as valid for real estate as it is for most other asset classes, be they stock, bonds, commodities, etc. and point to alternative real estate investment strategies you may want to consider further. Check out the blog page HERE. Value Investing - Background to the Study The question of whether low cap rate or high cap rate properties are better investments goes back to Warren Buffet’s idea of value investing. The basic tenet of value investing is to invest in assets that are undervalued in some way; those that are not necessarily the most glamorous investments, but that are undervalued for some reason, and to invest in those. All kinds of academic studies going back to the 1980s that have found that value stocks generally outperform growth stocks. More recently other asset classes – stocks, stock indices, currencies, commodities, bonds – all have been examined to compare how value investments perform relative to growth investments and these too have consistently shown that value investing outperform growth investing. But Geg MacKinnon and his at the Pension Real Estate Association (PREA), and his co-authors, realized that this same effect had not been examined yet in real estate and their study fills this gap. Typically for most RE investor, when you talk about value you talk about whether the price is high or is it low and the core measure of this is the capitalization (‘cap’) rate. Initial question, then, is ‘do high cap rate properties do better than low cap rate properties’. Though this is a basic starting point, it is one that is very applicable to investors and investment managers as far as how they define their investment strategy – which kind of property, high or low cap properties, to invest in. Review us on iTunes! Proprietary Data - Extraordinary Results The first step in the analysis was to take National Council of Real Estate Investment Fiduciaries (‘NACREIF’) data and categorize the assets in their dbase according to those with high and those with low cap rates. First the researchers controlled for both time – when was a cap rate measured (1970s vs. 1990s for example) – and then for location; where in the U.S. was the property located. Each property in the dbase was then compared to the average at the same time and place for other assets in its class, be it office, apartment, industrial etc. Once that task was completed, the top 30% were defined as having high cap rates, and the bottom 30% were defined as having had low cap rates. Every asset was then analyzed for how it performed over time, and the results were consolidated to see how the assets with different cap rates performed relative to others. Results show that low cap rate investments are significantly better investments than low cap rate properties. This result holds in absolute terms, in risk adjusted terms, holds across property types, across time. The (statistically significant) results are, on average: High cap rate office properties (cheaper ones) outperform low cap rate office properties (expensive ones) by 75 bps per year – that is a ‘country mile’, and yet not as high as other asset classes. High cap rate apartment investments outperform low cap rate investments by 212 bps per year – over 2% per year. High cap retail outperforms low cap retail by 182 bps. For industrial the difference is 186 bps per year. Risk Adjusted Of course, the next question is, well, what about risk? Risk was addressed in the study by looking at the frequency by which these results held true over the course of the study period – 1979 - 2010. The upshot was that higher cap rate assets (cheaper properties) co